The Emirates Economist

Economic analysis of events in the United Arab Emirates and the Gulf

Saturday, December 29, 2007

The Economy Makes Us Fat

That headline is the one Newsweek uses, and it's the subtitle of a new book. But actually that's not accurate. Unless we're being force fed, overeatting is a choice. The question is, why are we overeatting? From the article:

Is a fatter population an inevitable consequence of an advanced economy? Health economist Eric Finkelstein, co-author of the new book "The Fattening of America" (John Wiley), thinks so. Thanks to economic advances, he argues, we spend more time on our butts—at the computer, in front of the TV, in the car—than our parents and grandparents did, and we spend less time in the kitchen making healthful meals or outdoors burning calories. And everywhere we go we're tempted by a growing array of cheap, high-calorie, fat- and sugar-laden treats. The result: nearly two-thirds of American adults now qualify as overweight or obese. [A similar proportion of the poor Americans are also obese.]

From the interview it's clear Finkelstein and I agree individuals are responsible for their own obesity, not the economy:

Worse choices? Not from an economist's perspective. We're fatter, but that does not mean that we are worse off. We could do without the low-cost food or the new technology, but most Americans would prefer not to. The reason is that the costs of being thin, in terms of what they would have to forgo, have just gotten so high that people are saying "I'd rather be fat" than make the increasingly difficult sacrifices necessary to be thin.

What about the costs to our health of carrying around a lot of extra weight? Our research suggests that, even with this knowledge, many people will still choose to be overweight. We found that overweight individuals are aware that their excess weight makes them more likely to get diabetes, cancer, and heart disease. ...Employers could adapt some of those ideas to combating obesity in the workplace. Employers should use the types of strategies that are profit-maximizing. After all, that is what most [companies] are in business to do. I would subsidize healthy food in the cafeteria, maybe even have a fitness center. It's a nice perk and a great way to attract young, healthy workers.

But you don't think implementing weight-loss programs makes sense economically?In order to be a cost-saving program, employees would have to lose enough weight, keep it off long enough and stay with the company long enough so that the reduction in health-related costs would be borne by the company. In reality, people change jobs every five years on average, so these programs are unlikely to pay off for most firms.

People do want to lose weight and that's why they're willing to pay for diet advice, or pills or procedures. Some economists are even hoping to make money with the economics diet.

Friday, December 28, 2007

KippReport daily

For those interested in following topics followed by the blog - that is, economic events in the UAE and the Gulf - it is worth checking the KippReport each day. Today is a good case in point. Check it out.

Sunday, December 23, 2007

Reexport abuses

The Financial Timesreports that Dubai is showing some willingness to play along with international controls designed to limit Iran's ability to develop nuclear weapons. An excerpt:

Mention sanctions to Iranians and their answer is, often, Dubai. As the US has tightened the squeeze on financial dealings with Tehran and other countries have slowly followed, Iranians have sought to do business through neighbouring Dubai, an open, free-wheeling emirate and transhipment hub that has long welcomed them.

But even Dubai, and the federal government in the United Arab Emirates, is now showing signs of unease as US pressure on banks to stop lending to Iran mounts and security concerns over the presence of a large Iranian community intensify.

Following the introduction of new export control laws, the UAE has stepped up the inspection of cargoes heading for Iran, confiscating last month a shipment that contravened United Nations sanctions aiming to hem in Iran's nuclear and missile programmes.

Some of the 350,000 Iranians in Dubai are also starting to face restrictions. Anecdotal reports suggest some have been unable to renew residence visas. Nasser Hashempour, vice-president of the Iranian Business Council of Dubai, says it is becoming almost impossible for new Iranian businesses to secure permits....The restrictions suggest that politics is finally intruding on business in the emirate, despite long-standing UAE government attempts to keep the two apart....with the large Iranian community promoting trade flows that make Iran the emirate's single largest trading partner, the UAE has been keen to also promote business with Iran.

The UAE government dismisses suggestions that the welcome to Iranians has cooled.

Instead, officials cite a combination of factors that could affect the business relationship.

First, the government's attitude is that it will not follow the US in adopting unilateral sanctions against Iran but will resolutely abide by UN Security Council resolutions, which have targeted three leading Iranian banks and the Quds Force of the Revolutionary Guard.

Second, concern over the UAE's reputation - particularly following the embarrassing discovery that front companies working for the A Q Khan illegal nuclear procurement network were based in the UAE - has led to tighter controls on re-export trade. "Export controls are not designed against Iran but they protect the reputation of this place," says an -official.

Some 40 companies have been shut down over transhipment offences, a few of them allegedly involved in shadowy Iranian-related business.

Eidonomics

There has been a fair bit of work in economics looking at the effect of Christmas on western economies created by the unevenness in purchasing. (I went looking a good summary, and - why should I be surprized? - finally found one by Tyler Cowen at Marginal Revolution.) The Hajj has similar features. One difference of course is with the Hajj all pilgrims are flying to and from the same place at the same time. During the Christmas holidays many people travel, but they're all going to grandma's (for example) -- not literally all the same place.

When it pays to have a backup car...

...And you can afford it. Gulf News that traffic fines are not high enough to deter some people. It's not a fine, it's the price of driving like a nut:

Police have abolished a system under which errant motorists could pay a fee to avoid confiscation of their car - because it was not enough of a deterrent to bad driving.

It was found that the majority of motorists who paid money instead of having their vehicles confiscated then went on to repeat the offences.

Under the previous system, which was implemented several months ago, drivers could pay Dh100 per day for each day of the confiscation period. They could choose to pay for all or a number of days.

The confiscation period is from one week to three months, depending on the severity of the offence. However, motorists who committed dangerous offences did not have the option of paying to avoid having their vehicles impounded.

Lieutenant General Dahi Khalfan Tamim, Chief of Dubai Police, said the system was changed because it did not reduce the number of traffic offences.

Awesome

Drug bust in free zone: Just how big was it?

Sunday's New York Times has a long article on free zones around the world, and the way they are used to move counterfeit drugs and cleanse their provenance. It's not all about the UAE (Dubai and Sharjah are conflated by the author of the article), but it is used as the example.

Quoting:

Three months ago, when the authorities announced that they had seized a large cache of counterfeit drugs from Euro Gulf’s warehouse deep inside a sprawling free trade zone here [Sharjah], they gave no hint of the raid’s global significance.

But an examination of the case reveals its link to a complex supply chain of fake drugs that ran from China through Hong Kong, the United Arab Emirates, Britain and the Bahamas, ultimately leading to an Internet pharmacy whose American customers believed they were buying medicine from Canada, according to interviews with regulators and drug company investigators in six countries.

The seizure highlights how counterfeit drugs move in a global economy, and why they are so difficult to trace. And it underscores the role played by free trade zones — areas specially designated by a growing number of countries to encourage trade, where tariffs are waived and there is minimal regulatory oversight.

The problem is that counterfeiters use free trade zones to hide — or sanitize — a drug’s provenance, or to make, market or relabel adulterated products, according to anticounterfeiting experts.

The article continues (emphasis added):

Dubai is particularly attractive to counterfeiters because of its strategic location on the Persian Gulf between Asia, Europe and Africa. Records show that nearly a third of all counterfeit drugs confiscated in Europe last year came from the United Arab Emirates. “Three or four years ago, Dubai did not even appear on the radar screen,” said an investigator for a major American drug company who is based in China and requested anonymity because he did not have authority to speak for his employer.

Dubai is vulnerable because of the huge volume of goods that move through its free trade areas, and because of what is perceived by some in the pharmaceutical industry to be a murky line of authority for rooting out counterfeits there. “It is not clear that the normal Dubai customs authorities have jurisdiction,” said Rubie Mages, a director of global security for Pfizer.

The authorities in Dubai do show a willingness to act when drug company investigators tip them to possible counterfeits, as they did in the raid announced earlier this year. “Dubai has taken a big step in fighting the counterfeiters,” said Ahmed Butti Ahmed, director general of Dubai customs. But significant quantities of fake drugs are still getting through, international health officials say.

More:

In July, the authorities in Dubai said fake drugs from Mauritius had been seized at a free zone next to the Dubai airport. There were more than half a million pills of counterfeit Plavix, a blood-thinning drug made by the French company Sanofi-Aventis. The Dubai health authorities say they do not know who made it. Some pills, a government official said at the time, contained cement powder.

There has been punishment and regulatory progress:

In Dubai, seven officials associated with Euro Gulf were convicted recently and sent to prison, customs officials said. “We have been successful in getting customs authorities to work with us to inspect and to seize questionable goods, but we still have a long way to go,” Ms. Mages said....[T]here is no shortage of Chinese companies making fake, subpotent or adulterated drug products.

“Some of them in the morning, they manufacture good drugs and in the afternoon and evening they manufacture counterfeit medicine,” said Dr. Mohammed Abu Elkhair, a health official in Abu Dhabi who helped organize a conference last month in the capital city to educate United Arab Emirates officials on how to combat counterfeit medicine.

Saturday, December 15, 2007

Dubai's future clouded in debt?

Dubai is on a spending spree, and financial analysts are starting to wonder about the amount of debt the city-state is racking up.

Its oil production is dwindling, and its debt load is four times the average among other Persian Gulf states. Credit-rating companies are asking for more information to determine how sound the government really is.

"From published documents, it is difficult to get a picture of the complete financial situation," said Standard & Poor's analyst Farouk Soussa. "The transparency isn't good."

One of seven emirates making up the United Arab Emirates, Dubai, like other Middle East governments, has been on a deal-making binge. Companies owned or backed by the government have signed agreements or made plays for billions of dollars in assets this year, including stakes in American and European stock exchanges, a Las Vegas casino operator and, most recently, a chunk of Sony Corp. Part of Dubai's deal-making is financed by debt.

At the same time, other Dubai entities have launched expansion plans relying on public borrowing. Nakheel, a government-controlled company building a giant, palm-tree-shaped island development, placed $750 million in bonds this month to finance its plans. Government-owned Jebel Ali Free Zone recently listed 7.5 billion dirham ($2 billion) of bonds....Dubai also has taken a more-complex approach to investing overseas. Most other deal-making countries have used massive investment authorities to pursue their deals. The Abu Dhabi Investment Authority, for instance, bought a $7.5 billion stake in Citigroup Inc. last month. In contrast, Dubai's ruler, Sheikh Mohammed bin Rashid al-Maktoum, has entrusted a cadre of lieutenants to run his own and his government's business interests. They often compete with one another and hunt for deals independently, but they all ultimately answer to Sheik Mohammed.

The government association has helped a handful of Dubai corporate entities get high credit ratings. The assumption is that Sheikh Mohammed or his government will come to the rescue in a pinch. And if Dubai gets overextended, analysts expect the emirate's much-richer cousins in Abu Dhabi will lend a hand. Abu Dhabi is the capital of the U.A.E., and its ruler is the country's president. Sheikh Mohammed is prime minister....As its oil supplies dwindle, Dubai has diversified its economy into financial services, tourism and real-estate development, among other pursuits. Those revenue streams and their underlying assets are difficult to pin down without access to government books.

In a graphic accompanying the article Abu Dhabi's sovereign rating is given as AA/stable/A-1+. Abu Dhabi's debt as a percentage of GDP is 2.9%. Dubai's sovereign is "not available." Its debt as a percentage of GDP is 41.8%.

Friday, December 14, 2007

Jimmy Carter does not feel your pain

He is a pain.

I will admit it. When I was young and foolish I voted for Jimmy Carter for president. (Yes, that's how old I am.) I even read his campaign autobiography, Why Not the Best?. It's revealing that why not the best translated into Jimmy knows best, as in his inability to delegate even the setting White House tennis court schedule.

Recently, Carter had an op-ed in the Washington Post on the plight of African farmers. FreeXchange says it better than I would:

Mr Carter rails against the way American farm subsidies can harm poorer countries, pointing out a few interesting facts along the way:

A 2002 report by Oxfam International estimates that in 2001 sub-Saharan Africa lost $302 million as a direct result of U.S. cotton subsidies, with two-thirds of the loss sustained in eight countries -- Benin, Burkina Faso, Mali, Cameroon, Ivory Coast, Central African Republic, Chad and Togo. Compared with American humanitarian assistance, the subsidies to U.S. cotton farmers amount to more than the U.S. Agency for International Development's total annual budget for all of sub-Saharan Africa.

So we should scrap American protections, right? No no no. Not at all! Displaying a terrifying sort of logic, Mr Carter in his concluding paragraph argues:

Cotton production costs 73 cents per pound in the United States and only 21 cents per pound in West Africa, so American farmers do need protection in the international marketplace.

If cotton production is so much cheaper in West Africa than in the United States, then more production should happen there and less should happen here. If Carter is really interested in the well-being of West African farmers, “whose scant livelihood depends on cotton production,” he should advocate free trade in cotton. Why instead does he advocate that U.S. farmers be protected in the international market place? West African incomes will continue to suffer if U.S. subsidy programs are replaced by U.S. tariffs, which is what Carter seems to be advocating. How does it help Malian farmers lift themselves out of poverty if they can’t effectively compete on their advantages? Higher U.S. tariffs would only drive down the world price (as subsidies do) and likely compel other importer nations to raise tariffs to protect their own producers, shrinking the market further for Malian farmers.

Thursday, December 13, 2007

When bad customers are good

It's a current mantra: fire your bad customers. Sprint, for example, cut off customers who were using its call center to excess. But the logic doesn't always go through.

In the study, "Customer Value-based Management: Competitive Implications," Zhang, Raju and Subramanian [Wharton School of Business] break ground by analyzing CVM in the context of a competitive environment. The researchers acknowledge that firing bad customers may make some sense in industries where there is little or no competition. If a firm treats all customers equally, the argument goes, not only does the company waste resources on attracting and retaining unprofitable customers, it also under-serves profitable customers, who may become unhappy and leave.

However, for the overwhelming majority of companies operating in a competitive environment, firing low-value customers can be counterproductive, the researchers conclude. The key reason: Companies that rid themselves of low-value customers -- or take steps to turn low-value customers into high-value ones -- leave themselves open to successful poaching by competitors. If the competition knows that you have fired many or all of your low-value customers, they are likely to intensify their efforts to take your remaining customers away from you because they now know that all, or most, of those remaining customers are of the high-value variety.

Wednesday, December 12, 2007

Central bank governor denies reports

United Arab Emirates Central Bank Governor Sultan bin Nasser Al Suwaidi may step down amid continuing pressure for the Gulf state to drop its dollar peg, according to people familiar with the matter.

Officials at the central bank, who declined to be identified, told Zawya Dow Jones that a change could happen as early as Dec. 18, with Saeed Mubarak Rashid Al Hajeri, current chairman of Abu Dhabi Commercial Bank tipped to take over.

With inflation in the U.A.E. expected to exceed 10% this year Al Suwaidi, a veteran at the central bank, has come under increasing pressure to abandon the country's currency peg with the U.S. greenback that has lasted since 1973.

The U.A.E. dirham is fixed at a rate of 3.67 to the dollar and like other Gulf Cooperation Council countries the central bank has closely copied U.S. Federal Reserve decisions to cut interest rates.

News of Suwaidi's possible departure comes on the same day that the U.S. Fed is expected to cut interest rates for a third straight time to deal with a prolonged housing slump and tight credit markets.

Saturday, December 08, 2007

Weakened Dollar Slows Dubai Tower's Race to the Skies

U.S. policymakers and consumers have committed one of the few unforgivable sins in this desert boom town: They've slowed the building down.

"We don't want the United States to fail, but we don't want to go under with them," said Yasar Narrar, a strategy adviser to the executive office of the ruler of Dubai, Sheik Mohammed bin Rashid al-Maktum. Dubai is one of seven states in the United Arab Emirates.

Last month, the Emirates became one of the first Arab countries in the Persian Gulf to declare the dollar's fall a crisis. Local currencies' peg to the dollar was hindering growth and squandering the opportunities presented by $99-a-barrel oil, said Sultan Nasser al-Suweidi, the governor of the Emirates' central bank. ...As recently as last month, some construction workers on the Burj Dubai and other projects made the equivalent of as little as $109 a month. Back home in India, where the dollar has fallen 14 percent against the rupee in the past 18 months, remittances that workers here sent to their families steadily lost value.

"I work here, and I can't save anything. I'll ruin my family," said Ram Chandra, 33, a mason from the north Indian state of Rajasthan. ..."Every time I telephone my family, they say, 'Cancel your visa and come home,' " Chandra said. All the workers in the room said they planned to do so. ..."It's far more attractive for them . . . to be living in their home country and making the same wages and living far more cheaply," said Tom Barry, general manager for Arabtec, one of the lead construction contractors for the Burj Dubai.

Thursday, December 06, 2007

Governor: "No need for revaluation"

Frankfurt: The UAE central bank said yesterday it would leave its dollar peg unchanged for the "foreseeable future" after Gulf rulers agreed to keep any currency reform talks secret to calm markets.

UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi, who complained last month he was under growing pressure to drop the peg and track a currency basket, said yesterday there was no need to allow the dirham to rise against the tumbling dollar....The remarks were Suwaidi's first since a Gulf Arab summit overshadowed by disagreement on currency reform between Saudi Arabia and the UAE, the two largest of six economies preparing for monetary union as early as 2010....Al Suwaidi had nourished market expectations that the UAE and some of its neighbours would change currency policy when he said in a Tokyo speech last month the dollar's decline had taken his country to a "crossroads" on dirham policy.

In a subsequent interview, Al Suwaidi said he was under pressure from "communities and companies" to drop the peg and track a currency basket....Saudi Arabia dismissed any suggestion of an end to its dollar peg at the summit which ended in Qatar on Tuesday.

Dubai: The UAE Central Bank has cut its main interest rate by 15 basis points to 4.5 per cent. The move brings the UAE into line with the US Federal Reserve's benchmark interest rate. Analysts say it is a clear sign that the UAE is sticking with the dollar peg.

Yesterday Marios Maratheftis, head of research for the Middle East at Standard Chartered was quoted as saying, "Within the next two months, the GCC will likely revalue" said yesterday. ... "The question is whether or not they will drop the pegs - ultimately a political decision."

Central Bank turns tables on money changers

The Central Bank is now saying the money changers must defy the law of gravity (r.e., the market forces of supply and demand), and obey the official rate. The Gulf News reports:

The UAE Central Bank on Monday directed money exchange houses to refund to their clients any differences arising from purchasing US dollars at rates outside the official band on the weekend.

The Central Bank has asked persons involved to approach its Dubai office with original invoices within a month. "The Central Bank will arrange with the money changers to send the difference amounts to their addresses," the statement said....Exchange firms widened the spread between the dollar's buying and selling prices to Dh3.35 and Dh3.685 respectively on December 1 and 2, compared to the rates prevailing on the previous day of Dh3.65 and Dh3.68 set by the commercial banks....[T]he central bank considered the move a clear violation of its regulations and warned exchange firms of severe penalties if it happens again.

There's no statement about what the severe penalties would be, or why -- given that the regulations were so clear -- there were no penalties this time.

What will happen when the money changers must choose between a regulatory penalty and the penalty of financial lost? They might simply close their exchange window.

Monday, December 03, 2007

UAE money changers throw out the dollar

Arbitrary dirham rates offered by UAE money changers, in some cases as low as Dh3.05 per dollar or almost 17 per cent lower than the official rate, are sowing more confusion in the market where speculation on the dirham's revaluation is already rampant.

The UAE currency has been pegged at 3.6725 to the dollar since 1997 and until Sunday there was no change in the official peg....Money changers, hotels and stores in shopping malls were accepting dollars at rates ranging from Dh3.05 to Dh3.50 per dollar yesterday...."It is strange," said Ahmad Jan from Saudi Arabia as he walked between a bank branch and a money exchange at Deira City Centre and noted that the bank offered 60 fils more per dollar.

"What you see here is the official rate," a manager at the bank said.

Moroccan visitor Nasser Bin Omar said he accepted the lower dollar rate from the money dealer because he did not want to wait in the long queue at the bank.

Ah, yes, opportunity cost. The time cost of waiting. If the same thing is being sold at two different rates, where do the queues occur?

The UAE warned markets against betting on a dirham revaluation as investors piled pressure on the region's dollar pegs, expecting Gulf states to change currency policy at a summit this week....In remarks carried by the Al Khaleej newspaper, [Central Bank Governor Sultan Bin Nasser] Al Suwaidi moved to quell investor expectations that a change was imminent....Bahrain's central bank threatened to take action against anyone betting on dinar appreciation and accused foreign banks of spreading revaluation rumours, the Middle East Economic Digest reported after an interview with Governor Rasheed Al Maraj.